News and Insights

Ten years on from the Great Recession, is another one likely?

20.08.2017

It has almost been ten years since the 2007 “Credit Crunch” expanded into the worst recession since the Second World War one year later. What began as a run on Northern Rock led to some of Britain’s largest banks like Lloyds and the Royal Bank of Scotland being bailed out by taxpayers. Across the Atlantic, we witnessed banking giant Lehman Brothers collapse.

The impact the recession had on the wider economy was profound. To try and attract customers threatened with unemployment and sinking house prices, Tesco’s sales margin in 2008 was damaged by their bid to enlarge their consumer base. That year, the retail giant reported that their third quarter like-for-like sales growth was just 1.9 per cent, its worst performance since the last fiscal crisis to disrupt the UK economy. That event was Black Wednesday in September 1992, which witnessed the then chancellor, Norman Lamont, pull Britain out of the precursor to the euro, the European Rate Mechanism.

Generally, the retail sector experienced mixed effects after the 2007 “Credit Crunch.” Aldi’s sales expanded by 20.7 per cent following the Northern Rock bailout and Lidl witnessed its sales increase by 12.8 per cent. It also led to consumers changing their spending habits. Stores like Poundland delivered record sales at the end of March 2009, grossing £395 million in sales compared to their total the previous year of £330 million. They also benefitted from a 22 per cent increase in their share of AB socio-demographic shoppers, as middle-class families turned to bargains to save money.

The Labour government of the time attempted to keep the economy afloat by injecting money into the economy through quantitative easing. The Bank of England cut interest rates to 0.5 per cent to try and encourage consumers to spend more money. The Coalition government which succeeded it withdrew £6 billion from the economy in 2010. They also increased VAT from 15 per cent to 20 per cent to increase its revenue.

Five to six years after the “Credit Crunch”, the economy started to grow again thanks to a rise in retail sales. The London Olympic Games of 2012 and the Queen’s Golden Jubilee experienced a rise in tourism which helped provide the City with a financial boost. By March 2013, retail sales increased by 2.7 per cent compared to the previous year. Disposable income rose due to George Osborne’s introduction of a tax-free allowance for the lowest earners and a cut in fuel duty. Demand for electrical goods like tablets and smart phones soared. Online retail sales rose by 10 per cent.

Despite the Bank of England’s warnings that Brexit will create uncertainty, the economy has managed to avert another recession. Mr. Osborne warned that would happen if the country opted to leave the European Union in 2016. The pound may have sunk to its lowest level since 1985 following the vote, but the economy has steadily grown. The FTSE 100 rose by 16 per cent following the vote and the FTSE 250 expanded by 11 per cent. UK exports and imports both grew by £400 million and £300 million respectively. British firms like HSBC, BP, Next and even the Royal Bank of Scotland have recently reported that their sales figures have grown. Amazon and Snapchat have both announced they will be enlarging their UK operations.

Yet the Bank of England’s Governor, Mark Carney, is concerned about the effect Brexit will have on the economy. The Deputy Governor, Sam Woods, is urging businesses to restructure their contracts in the possible event Britain leaves both the European Union and the European Economic Area, or the Single Market as the latter is commonly referred to. Ten years on from the “Credit Crunch”, it appears that another recession is possible, but the Bank is ignoring two factors which could cause it: alarming levels of consumer debt and the Italian banking crisis.

Following last year’s EU Referendum, the Monetary Policy Committee cut interest rates further to an all-time low of 0.25 per cent to maintain consumer spending. In 2009, people were informed that shrinking interest rates would be a short-term measure, but the Bank seems to have encouraged soaring debt levels by doing so. Low interest rates discourage people from saving and provoke them into borrowing more money through credit card spending. It also drives up the prices of houses and cars, meaning that being able to buy one of these purchases outright is now beyond the capacity of many people. Drivers are now taking out finance plans to help them buy a car over a certain period which is causing more debt.

The Federal Reserve in the United States increased interest rates for the first time since 2008 and their economy continues to grow. The Bank’s problem is that they are so fearful of raising interest rates that they predict spending levels will decrease. They worry this will spark another recession. Considering the “Great Recession” ended in 2013, spenders should have been persuaded to start saving their cash through a mild interest rate rise instead of being punished.

The consequences of the Italian banking crisis continue to loom. The European Union has recently invested 17 billion euros to rescue failing banks Veneto Banca and Banco Popolare di Vicenza. Government debt is 100 per cent of domestic output and unemployment is 2 per cent above the eurozone average in Italy. Beppe Grillo’s party, the Five Star Movement, could soar in popularity if the migration crisis continues to devastate Italy. This could lead to a withdrawal from the euro. And they also face the prospect of paying more in EU contributions once the UK leaves, which they cannot afford. Italy could pull out of the euro anytime soon which would hinder economic growth across Europe.

There does not seem to be enough discussion among the “experts” about these warning signs and like the “Credit Crunch”, another recession could take us by surprise. Is it fair to say ten years on that we have learnt nothing from the last global fiscal crisis? Yes it is.

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Matthew Snape is a journalist for Centus UK and specialises in topics relating to the EU and UK economy, politics and payments industry. Matthew is also in the middle of completing the National College for the Training of Journalists qualification.